Today’s auction of $35 billion in five-year U.S. Treasury notes sold out a a yield of 0.769%. The bid-to-cover ratio of 2.72 was somewhat lower than the four-week average ratio of 2.9.

Prior to the sale, bonds yields were up on the 10-year and 30-year notes, with the 10-year note rising to a two-month high of 1.796%. The higher yields came as demand for U.S. Treasuries slackened somewhat on reports that budget negotiations in Washington were making some limited progress.

Should a deal emerge that will avoid the fiscal cliff, bond prices are very likely to fall and yields to rise as the federal government has to pay more to entice buyers. If no deal is reached, demand for Treasury bonds will rise and yields will fall as investors head for safety.

At today’s auction, primary dealers took nearly $13 billion in five-year notes, while direct bidders took $10.6 billion (about 30.3%) and indirect bidders took $11.3 billion (about 32.3%). The direct bidder portion was substantially higher than the 13.3% average for the last four sales, and the indirect portion was below the 42.4% average.

Paul Ausick

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